Passport Capital Gives Yelp Inc (YELP) A Positive Review

As if the competition from Google and Yahoo! was not enough, Facebook Inc (NASDAQ:FB) appears to be breaking into the into the search and review market with its newest search option. Facebook’s Graph Search will allow its over one billion users to search their social sphere for relevant info. This includes infringement on Yelp territory with places search. With almost 45% of all searches occurring on mobile, many tech companies will indeed need to beef up their mobile offerings. This ‘need’ is part of what has put pressure on Facebook’s stock since its May 2012 IPO. Questions continue to swirl surrounding concerns related to mobile monetization, but last quarter’s results helped give investors some hope. The social networking company’s total advertising revenue was up 41% year over year, while mobile ads made up up 23% of the total. This is an increase from the 14% of revenue mobile ads made up in the previous quarter.

Yelp’s grand plans

Boding well for Yelp are partnerships with Bing search and Apple maps, while other major opportunities include international expansion plans. This includes launching operations in Poland, Denmark, Norway and Finland. Over half of Yelp’s users are now accessing the site via mobile devices, and so Yelp should be able to leverage its user base via its mobile app. Yelp currently runs no ads on its mobile apps, which also presents a growth opportunity for when Yelp finds ways to monetize mobile.

Don’t be fooled

While Yelp is still trying to get a grasp on proper monetization, it has posted negative earnings for the last three quarters, but is expected to post EPS of $0.02 in 2013. With this, its price to earnings multiple (based on next year earnings) is scary high at over 1000. Other reasons for concern include the future expectations for Yelp. Although the social review company has seen the best earnings growth over the last five years of the high profile IPO companies, Wall Street expects only most modest growth for Yelp in the future:

	Yelp	Zynga	Facebook	Groupon
Historical 5-Year EPS Growth	94%	48%	-41%	-2%
Expected 5-Year EPS Growth (Wall Street estimates)	18.50%	21%	29%	27%

It seems that all the newly IPO’d tech companies are still trying to figure out monetization, with Facebook showing some of the best progress in being able to address its mobile monetization issue. This is a similar issue that Yelp will likely face. This leads me to remain a bit uneasy, despite Passport’s positive review of the company. Google spent $151 million on fellow Yelp competitor Zagat in 2011, and Google’s purchase of Zagat was based on a roughly 3.75 price to sales multiple; meanwhile, Yelp trades at a P/S multiple of 11. The social review company may well be an exciting high growth story and worth taking another look at in a few quarters, but for now it’s still rather speculative.

Passport Capital Gives Yelp Inc (YELP) A Positive Review

Published on February 12, 2013 at 7:45 pm by The Motley Fool in Hedge Funds

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